November 07, 2007
Factors Influencing Cost
How much will it cost? A number of factors determine the cost of an individual disability income policy, including:
Age: Younger persons pay less per year for a policy than those who are older and more likely to become disabled.
Benefit amount: Policies that replace more of an individual’s salary are more expensive. A policy that replaces 80 percent of your salary costs more than one that replaces only 60 percent of your salary.
Benefit period: The shorter the benefit period, the less expensive the policy. For example, a policy with a two-year benefit period costs less than a policy that pays benefits to age 65, or the retirement age specified under Social Security.
Current health status: Your health status determines whether you are eligible for standard rates or rates that are higher. A policy also may exclude from coverage any health conditions that exist before the policy is issued.
Definition of disability: A policy that pays benefits if you are unable to perform the duties of your own occupation is more expensive than a policy that pays benefits if you are unable to perform the duties of any job for which you are reasonably qualified.
Discounts: Many companies offer discounts for policies issued at the same time on more than one person, as well as when an employer (or association) collects the premiums for individual policies from employees and pays the insurer.
Extent of disability: A policy that pays benefits only if the policyholder is totally and permanently disabled costs less than a policy that also pays benefits for a partial or temporary disability.
Gender: Women usually pay more than men for an individual policy because claim costs are higher for women than men (usually pregnancy related issues) . Under a group policy, however, men and women typically pay the same rate.
Optional benefits: For an extra premium, some policies offer additional benefits, such as cost-of-living increases or the option to purchase higher benefits in the future.
Smoker/tobacco use: Most companies either give a discount to non-tobacco users or add a surcharge to the premium for tobacco use.
Type of job: Expect to pay more (or be declined) for a policy that covers a high-risk occupation compared to a low-risk line of work.
Tips on Purchasing
Say you’re a software engineer working is Silicon Valley and you suffer head trauma from playing ultimate Frisbee; you no longer have the ability to concentrate on your primary work but you could work at something, say bending tortillas at the local Chipotle. Are you ‘disabled’ ? Depends on how your LTD policy defines disabled.
Examine the disability definition. Some policies pay benefits if you are unable to complete the duties of any occupation for which you are reasonably qualified by training, experience, and education (brain surgeon vs. teaching at medical school). Others pay benefits if you are unable to perform the major duties of your own occupation. Some policies also pay benefits if you become ill or injured and are unable to earn a specified percentage of your income.
Ask for outlines of coverage so you can compare the features of several policies. Make sure you fully understand any policy you are considering-a policy that does not provide the protection you need is not a good buy. Features to look for in a policy include:
- Definition of disability (own occupation or any occupation; earnings test)
- Benefit amount
- Elimination period (waiting period before benefits begin)
- Length of benefit period
- Benefits for partial disability
- Replacement of lost income
- Return-to-work programs
Recurrent disability (relapse provision) - Cost-of-living adjustments or the right to purchase additional coverage
- Mental health/substance abuse provisions
- Noncancellable or guaranteed renewable
- Exclusions or other coverage limitations
Check that the company and agent are licensed in your state. If you have concerns, contact your state insurance department (they usually have a web site). An online resource for contact information is www.naic.org, the Web site for the National Association of Insurance Commissioners (NAIC), an organization of insurance regulators from each state.
Look for a company that is reputable and financially strong. Several services rate the financial strength of companies, and rating information can be obtained from your agent and public or business libraries.
Rating agencies include:
A.M. Best Company
www.ambest.com
or (908) 439-2200
Standard & Poor’s Insurance Rating Services
www.standardandpoors.com
Duff & Phelps Inc.
www.insure.com
Moody’s Investor Services
www.moodys.com or
(212) 553-0377
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